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Lesson 8, Topic 2
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# Income Tax and PAYE (Pay as You Earn)

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Income Tax: is the part of a person’s income above a minimum value that is paid to the Government.

PAYE (Pay As You Earn): Is a method of paying tax where employers deduct income tax from their employees’ pay.

Taxable Income = Total Income – Allowance

Tax allowances table:

(i) Personal allowances = 20% of earned income + N5000

(ii) Claims for children = N2500 per child (Maximum of 4 children)

(iii) Dependent relative = N20000 per dependent relative (maximum of 2 dependents).

Rate of Income Tax

Allowances are as follows:

(i) Personal allowance = N60,000

(ii) Child allowance = N25,000 for each child under 16 years of age (for a maximum of 4 children)

(iii) Dependent relative allowance = Maximum of N40,000

### Example

A man has a total income of N528,000 per month. He has three young children. He claims N37,000 for a dependent relative. Calculate the amount of tax he pays.

Solution

First: calculate the allowances

Personal allowance = N60,000

Child allowance = 3  x N25,000 = N75,000

Dependent relative = N37,000

Total allowance = N172,000

Second: Calculate the taxable income

Taxable income = Total income – Allowances

= N528,000 – N172,000

= N356,000

Third: Calculate the tax on the taxable income

Taxable income = N356,000

= N200,000  + N156,000

Tax = 10% of N200,000 + 15% of N156,000

= $$\normalsize \frac{10}{100} \scriptsize \: \times N200,000 \: + \: \normalsize \frac{15}{100} \scriptsize \: \times N156,000$$

= N20,000 + N23,400

N43, 400

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